Political risk and valuation of renewable energy investments in developing countries

Ali Shimbar, Seyed Babak Ebrahimi*

*Corresponding author for this work

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

Irrefutably, energy transition has recently gathered momentum thanks to the Paris Agreement and renewable energy (RE) falling costs. However, unlocking the full socio-economic potential of energy transition requires encouraging Foreign Direct Investment (FDI) in developing countries where energy demand and the risk of stranded assets are growing. Encouraging FDI in developing countries necessitates addressing two highly controversial issues: measuring political risk and carrying out proper valuation of long-term RE investments. In this regard, current paper investigates the rationale behind classic risk-adjusted discount rate (RADR) approach. It finds that since RADR requires heuristics, it may lead to misrepresentation of real worth of RE projects in developing countries. Addressing this issue, the paper offers a hybrid method based on risk pricing which can incorporate political risk into valuation straightforwardly. The hybrid method is applied to a photovoltaic case in Iran. Surprisingly, while the analysis based on classic RADR approach indicates that the investment is not financially viable, the hybrid analysis demonstrates attractive return on the investment. This can contribute to unlocking a considerable annual amount of 270 TWh solar power in Iran. The empirical study also shows that the suitable rate to discount RE investments in Iran is 10.22%.

Original languageEnglish
Pages (from-to)1325-1333
Number of pages9
JournalRenewable Energy
Volume145
DOIs
Publication statusPublished - 1 Jan 2020

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Keywords

  • Decoupled net present value
  • Developing countries
  • Investment analysis
  • Political risk
  • Risk-adjusted discount rate
  • Stranded assets

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